View more on these topics

Case Study: Applying for pension protection is not always the best idea

Deciding which type of pension protection to apply for can be more complicated than just how much has been accumulated in the fund.


The problem: A client who is a long-standing member of a defined benefit pension scheme is considering applying for fixed or personal protection in advance of April’s reduction in the lifetime allowance from £1.5m to £1.25m. What factors should be taken into account when deciding which, if any, type of protection is the most appropriate?

The solution: Peter is one of the lucky few who have been in a good non-contributory defined benefit pension scheme for over 20 years and so has built up a significant pension. He had never really told anyone that he had been close to opting out of the scheme many years ago. Now, twenty years of inertia later, he was pleased that he had not got around to leaving the scheme.

Peter has just received a benefit statement from the scheme and is a bit concerned. His intention was to consider retiring at age 60, which was in just a couple of years’ time, but the normal retirement age under the scheme was 65.

He has also made £300 per month contributions into an AVC scheme.

Peter is married for a second time and his wife was younger than him. Together they have a couple of school-age children and a reasonable-size mortgage.

His family health history is poor and he had a minor heart attack two years ago, although he had fully recovered now.

Peter has been to visit his pension adviser to discuss pension planning. It appeared that his current pension benefit was valued at about £1.4m (20 times his prospective pension, plus his lump sum) as his employer paid about 12 per cent of his current remuneration of £150,000 into the scheme.

In addition, the scheme offered a spouse’s pension which was four times salary, with death in service benefits and the possibility of an ill health pension based on prospective scheme service. 

He has heard of fixed protection 2014, which would allow him to protect £1.5m of pension assets but is not happy that he would have to cease paying contributions and probably have to opt out of the pension scheme to avoid the extra accrual invalidating his fixed protection.

He knows he is due a couple of pay rises and also feels that, with the current inflation figure falling, the CPI limit on relevant benefit accrual could easily be breached.

Taking his adviser’s guidance, Peter has spoken to his employer and asked whether it would be prepared to pay him the money it contributs to his pension scheme in some other form of remuneration. The answer he got was that this would not be possible as it was not company policy.

His adviser has explained the concept of individual protection to him, which he understands would give someone with pension savings worth between £1.25m and £1.5m a personal lifetime allowance of the amount as valued on 5 April 2014.

The main difference between fixed and individual protection was that with individual protection, he would be able to continue saving without limit into the scheme but with the LTA tax charge applying to the excess over the personal LTA as set at 5 April 2014 of 25 per cent on money drawn as a pension, and 55 per cent on a lump sum. So his current pension value of £1.4m would be his new personal LTA.

This is obviously not quite as good as the £1.5m that could be protected by fixed protection but the idea of having to opt-out of his generous DB scheme is even less attractive to him. Peter’s health situation and his family circumstances meant that the ancillary death and health benefits were of a greater value to him, particularly for the next couple of years before retirement.

Two other things that he has been told by his pension adviser are:

  • If he did opt for fixed protection then he would have to watch out for auto enrolment, as any accidental auto enrolment could invalidate his fixed protection.
  • It would be advisable to stop his AVCs and perhaps redirect them into a different investment plan to avoid the tax charge on his money.

Mike Morrison is head of platform technical at AJ Bell



Mark Pearson: Capping charges is fraught with difficulty

Along with everyone else advising in the workplace pensions market, we are waiting for the Department for Work and Pensions to publish the detail following the recent consultation on charging. Although Steve Webb said last week any charge cap will be delayed until April 2015, the Pensions Institute report on the effect of charges within DC […]


Lawyers slam claims firm over ‘adviser watch list’

Regulatory lawyers have attacked a claims firm for publishing an adviser ‘watch list’ of firms it says consumers should be wary of. Claims firm Rebus has launched an online ‘adviser watch list’ of firms it is bringing claims against, stating either ‘case won’ or ‘under Rebus review’ next to the firm. The website says: “The […]


Barclays’ financial planning arm hit by customer data leak

Barclays is investigating after thousands of customer files who sought advice from the bank were reportedly stolen and sold on to rogue City traders. The Mail on Sunday reports customers from its financial planning arm had details of their earnings, savings, mortgages, health issues and insurance policies passed on to brokers. The information came from […]


FCA under fire over ‘slow’ annuities response

The FCA is under pressure to accelerate its annuities competition investigation after a thematic review found serious failings in the current market. The regulator’s 12-month thematic review of the market, published today, reveals 80 per cent of people who buy an annuity from their existing provider would be better off if they shopped around and […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm